Not This Time

The BOJ meeting last night resulted in no policy changes, as universally expected, but the press conference that followed found Kuroda-san disagreeing with the current market narrative. As a reminder, that narrative has the BOJ soon getting set to slow down their QE program and begin to follow the Fed toward somewhat tighter monetary policy. However, Kuroda was quite clear that he saw no reason to change things now as per the following comment,
“Given there is still a distance to the
achievement of the 2 percent price
stability target, I don’t think that we are
at a stage where we consider the timing
for a so-called exit or how to deal with
it. The Bank of Japan thinks it’s necessary
to continue tenaciously with the current powerful easing for the sake of the economy.” [My emphasis] And yet, despite a session where the dollar is broadly higher, the yen has rallied by nearly 0.5%. You would almost think that FX traders don’t believe what Kuroda-san is saying.

Certainly, inflation in Japan remains far below target. The BOJ’s bellwether is CPI ex fresh food and energy, which is currently running at 0.3%, an awfully long way from their 2.0% price target. It is hard to believe that the BOJ would tighten policy until that reading is at least 1.0% or arguably even higher than that. After all, how could they justify tighter policy if inflation is still essentially zero? Kuroda did address the reduction in JGB buying though, pointing out that they are trying to manage the yield on 10-year JGB’s, not buy a certain amount of them. And given that they own nearly half the outstanding paper, it can be no surprise that they now need to buy less to have a given level of control. As a price check, 10-year JGB’s yield just 0.068%, well within their control band. Clearly, buying less has not diminished their ability to achieve that end. When will their policy actually change? My gut tells me they are in no hurry to slow down QE and that the market is well ahead of itself in this regard. It could easily be another four or five years before the BOJ actually raises rates, although the current narrative clearly disagrees. Ironically, given how critical trade is to the Japanese economy, any yen strength is quickly passed on to the inflation data, driving it still lower and delaying the tightening further. At some point, it will become clear to the market that the BOJ is not going to adjust anything anytime soon, but for now, traders continue to have visions of USDJPY trading at par. Maybe not today, but sometime soon.

Looking elsewhere for inspiration, the pickings are sparse. The only data from Europe was the German ZEW data, which printed slightly better than expected, but not enough to change any opinions. And in truth, otherwise there has been little of note in the G10. Perhaps I can give a shout out to Sweden, where home prices have started to fall a bit more sharply, down 10% in the past quarter. While I don’t expect a global crisis on the back of this story, it may well be a harbinger of other bubbles getting set to burst. And given that virtually every asset is in a bubble state, that could be more concerning. But not yet.

In the EMG space, Mexico wears today’s crown for the largest decline, falling 0.8% on the back of the tariffs the US has imposed on solar panels and washing machines. This move, which the President promised, is seen as yet another blow to global trade, and in Mexico’s case, likely added further concern over the NAFTA situation. It certainly doesn’t bode well for NAFTA if the US is willing to impose tariffs on goods that come from Mexico. The point is, if the US does go down the road of more trade restrictions, and NAFTA should crumble, the peso will have much further to decline. In fact, a quick trip back to 20.00 and beyond is easily viable. Otherwise, nipping at the peso’s heels in the race for biggest decliner, ZAR has fallen a similar amount as concerns have arisen about the timing of President Zuma’s departure. Recall, the recent rally has been predicated on Ramaphosa starting soon. Any delay will inevitably be felt by the currency.

But the dollar is broadly higher this morning against the entire space, with those two currencies merely the laggards. I guess it is possible that the dollar has responded to the end of the US government shut-down, but it wasn’t clear to me that its decline was caused by the shut-down, so that seems a little strange. Of course, the equity market rallied on the news that the shut-down ended despite not falling over the threat of imposition of the shut-down, so I guess it is possible. As I have often said, markets are perverse.

Looking ahead to today’s session, there are no obvious catalysts on the horizon to drive movement. There is no data of note and no Fedspeak until Chicago’s Evans makes some remarks this evening. Commodity prices are mixed, with energy slightly higher but metals and ags a touch softer, so no real clear signal there. Equity prices, as seemingly always, are higher with US futures pointing in that direction as well, and Treasuries are little changed, with the 10-year hanging around just above that breakout level of 2.627%. In other words, it has all the markings of a quiet session at this time.